The economy grew at a slow rate of 0.7 percent in the first quarter of this year, according to this morning’s GDP report. But that low number–headlines stressed that it’s the slowest rate in three years–should be largely discounted. The underlying trend growth rate of the economy remains a moderate, and pretty steady, 2 percent.
There’s been a problem with seasonality in Q1 data of late, and growth rates for the quarter appear to be somewhat biased down. Also, January and February were unseasonably warm, so people spent less on heating (otoh, there was more building than we’d have expected).
The best way to control for this problem, as well as smooth out some of the noise in the annualized quarterly data, is to look at year-over-year trends. That way, if GDP levels in Q1s are biased down, this approach will factor that bias out (since they’ll be biased in each Q1). As you see in the figure, we’re right on trend.
A few observations:
–Business investment growth was strong last quarter, but part of that was driven by a huge 22% (quarterly, annualized) jump in buildings, which may be a weather effect, as noted above.
–I’m putting consumer spending, which comprises 70% of GDP, on my watchlist. Nothing dramatic, and the 0.3% annualized rate in Q1 is not going to stick, but it has decelerated a bit of late. As I wrote earlier this month, slower job and real wage growth, the latter a function of faster inflation, looks to me to be taking a small bite out of that key component.
–Price growth remains quiescent. The PCE deflator, yr/yr, is up 2% and the core PCE, the Fed’s preferred gauge, is up 1.7%, where it has been for the past year.
–In other words, nothing in this report should lead the Fed to worry about capacity constraints creating price pressures.
–And, ftr, nothing in here, or anything else I’ve seen, not just today, but in my life, should lead anyone to believe that Trump’s one-pager tax “plan” will take real GDP growth from its trend growth rate of 2% to 3%. To be clear, there will be strong quarters down the road, and administration officials will say foolish things about them. But keep your eye on the trend.